Freezing order in aid of enforcement of arbitral award should contain "ordinary business exception" (Court of Appeal)

In Mobile Telesystems Finance SA v Nomihold Securities Inc [2011] EWCA Civ 1040, the Court of Appeal considered whether a freezing order granted in aid of enforcement of an arbitral award should contain an exception to permit the respondent to deal with assets in the ordinary course of business.

NB: Leave to appeal this decision to the Supreme Court was refused on 13 June 2012.

PLC Arbitration

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The Court of Appeal has held that a freezing order granted in aid of enforcement of an arbitration award should contain an exception to permit the appellant (defendant) to make payments in the ordinary course of its business ...show full speedread

The Court of Appeal has held that a freezing order granted in aid of enforcement of an arbitration award should contain an exception to permit the appellant (defendant) to make payments in the ordinary course of its business. The appellant was resisting enforcement of the award (which was, therefore, not yet enforceable). There were no exceptional circumstances justifying the omission of the exception. Specifically, there was no evidence that the payment that the appellant was seeking to make would amount to dissipation of assets with the intention to avoid satisfying the award. Further, it could not be said that, in making the payment, it would be seeking to avoid execution of the award, as execution was not yet available.

The decision clearly distinguishes a freezing order granted in aid of enforcement of an arbitration award from one granted in aid of enforcement of a court judgment. Until any application to set aside leave to enforce an award has been heard and has failed, the award remains unenforceable and it will normally be appropriate to include the ordinary business exception in the freezing order. (Mobile Telesystems Finance Ltd v Nomihold Securities Inc [2011] EWCA Civ 1040.)

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Background

An arbitration award may, with the court's permission, be enforced in the same manner as a judgment or order of the court to the same effect (section 66(1), Arbitration Act 1996 (AA 1996)). Where leave is given, judgment may be entered in terms of the award (section 66(2)). The procedure for obtaining permission is set out in CPR 62.18. Permission to enforce the award is generally granted without notice. However, the defendant may then apply to the court to set aside the order giving permission and the award may not be enforced until the end of the period for such an application or until any application made by the defendant within that period has been disposed of (CPR 62.18(9)(b)).

In Camdex International Ltd v Bank of Zambia (2) [1997] 1 All ER 728, Aldous LJ said, (in connection with freezing orders (formerly known as Mareva injunctions):

"The purpose of Mareva relief is, and always has been, to prevent a defendant from removing from the jurisdiction his assets or dissipating them. It is not, and never has been, an aid to obtaining preference for repayment from an insolvent party." (page 734.)

In Iraqi Ministry of Defence v Arcepey Shipping Co SA (The Angel Bell) [1981] 1 QB 85, Robert Goff J (as he then was) granted a freezing order which made clear that the defendant was not prohibited from dealing with or disposing of its assets in the ordinary and proper course of business. Freezing orders against corporate defendants generally include a provision to that effect and paragraph 11(2) of the draft freezing order annexed to Practice Direction 25A provides that:

"This order does not prohibit the Respondent from dealing with or disposing of any of his assets in the ordinary and proper course of business."

In Masri v Consolidated Contractors International Company Sal and another [2008] EWHC 2492 (Comm) (www.practicallaw.com/7-508-1064), Tomlinson J (as he then was) omitted an ordinary course of business exception in a freezing order in respect of sums in several of the judgment debtor's bank accounts. He observed that he was satisfied that:

"in relation to assets such as balances in bank accounts, an "ordinary course of business exception" is inappropriate in the post-judgment environment."

The court has power to grant a freezing order in support of the enforcement of an award (for example, see Celtic Resources Holdings v Arduina Holding BV [2006] EWHC 2553 (Comm) (www.practicallaw.com/7-504-6264)). The court's power to grant post-award freezing orders derives from its general power to grant injunctions in aid of the enforcement of judgments, rather than section 44 of the AA 1996 (which gives the court power to grant injunctions in support of arbitral proceedings).

For further discussion about freezing injunctions, see Practice note, Freezing injunctions: an overview (www.practicallaw.com/8-203-9841). For detailed discussion about enforcement of arbitration awards, see Practice note, Enforcing arbitration awards in England (www.practicallaw.com/1-363-3952).

 

Facts

In December 2010, an arbitration award in the sum of US$208 million was made in favour of the respondent (Nomihold) against the appellant (MTSF), following an arbitration in London. The arbitration concerned a dispute arising out of an option agreement. MTSF did not challenge the award. On 26 January 2011, Gloster J granted Nomihold permission to enforce the award, under section 66 of the AA 1996. At the same time, she granted a without notice worldwide freezing order, restraining MTSF from dealing with its assets up to the value of US$208 million. The freezing order contained an exception making clear that it did not prohibit MTSF from dealing with or disposing of any of its assets in the ordinary and proper course of business. However, at the inter partes hearing, Nomihold applied for the removal of the ordinary course of business exception. MTSF did not oppose the removal of the exception at that stage and Gloster J ordered its removal.

MTSF applied to set aside the order granting permission to enforce the award. At a hearing on 18 February 2011, Burton J continued the freezing order pending the determination of MTSF's application. At the same time, he ordered that a tender process aimed at re-arranging a series of loan notes issued in 2005 should be allowed to proceed, finding that it would not involve a breach of the freezing order (see Legal update, Commercial Court decision on ambit of post-judgment freezing orders (www.practicallaw.com/1-504-9741)). There was no appeal against that decision.

In July 2011, MTSF applied to vary the freezing order, effectively to reinstate the ordinary course of business exception, to enable it to pay interest due to holders of the loan notes. It was common ground that the interest payment could properly be characterised as being in the ordinary course of business. David Steel J refused to vary the freezing order to permit the interest payment. His reasons included:

  • Where a defendant was a judgment debtor, it was not generally appropriate to include an exception to permit payments in the ordinary course of business in a freezing order.

  • Although MTSF was not (strictly speaking) a judgment debtor, Nomihold had an unchallenged arbitration award in its favour and MTSF's resistance to enforcement had already been characterised by Burton J as having "somewhat limited prospects of success".

  • He was not persuaded that the consequences of non-payment of interest by MTSF would be catastrophic.

MTSF appealed, arguing (among other things) that, although the ordinary course of business exception could properly be removed from a freezing order granted in aid of execution, a freezing order in that form should only be granted where there was a judgment creditor. There was a difference between the beneficiary of an arbitration award and a judgment creditor. The "touchstone" of the distinction was the ability to enforce. The award in this case was not yet enforceable and, therefore, David Steel J should not have treated MTSF as a judgment debtor.

Nomihold argued that the question was one of the balance of convenience: was it just and convenient for MTSF to be permitted to make the interest payment in the circumstances? The key factor was the balance of prejudice that would be suffered by either party should it lose the application to vary the freezing order, but then succeed on the application to set aside the permission to enforce the award as a judgment. This was a matter of discretion, which David Steel J had exercised in Nomihold's favour and that should be respected.

 

Decision

The Court of Appeal granted the appeal, reversing the decision of David Steel J.

At the outset, Tomlinson LJ, who gave the judgment of the court, observed that MTSF was just a vehicle of its parent company, MTS OJSC, set up to procure tax benefits. MTS OJSC was perfectly able to meet the award in favour of Nomihold and to discharge MTSF's obligations to the loan note holders. In circumstances where Nomihold was the beneficiary of an unchallenged London arbitration award, it was tempting to accede to Nomihold's argument that the balance of convenience lay in favour of preserving funds in the hands of MTSF, which would then be available for the purposes of executing the award in due course. However, that would be a "wrong and unprincipled" approach.

Although he had found in Masri that an ordinary course of business exception was inappropriate in a post-judgment situation, Tomlinson LJ thought that that may have been "too sweeping" a statement. On reflection, he considered that it would sometimes (and perhaps usually) be inappropriate to include an ordinary course of business exception in a post-judgment freezing order.

The touchstone for these purposes was enforcement, or the availability of enforcement. In this case, there was a judgment of the court but it was not presently enforceable. It followed that, although the freezing order could be said to be granted in aid of execution, it could not currently be said to be a remedy designed to effect execution, since execution was unavailable.

Gidrxslme Shipping Co Ltd v Tantomar-Transporters Maritimos Lda [1995] 1 WLR 299, which was decided under the Arbitration Act 1950, was a case in which the court had granted Mareva relief in aid of enforcement of two arbitration awards. It was clear in that case that the injunction contained an ordinary course of business exception.

Therefore, Tomlinson LJ found that, both as a matter of principle and authority, a freezing order in aid of enforcement of an arbitration award should usually contain an ordinary course of business exception. There was no basis upon which one contractual claimant should be able to prevent the satisfaction of the claims of others in a similar position.

Furthermore, it could not be said that payment by MTSF of the interest due to loan note holders would constitute dissipation of assets with the object or effect of denying satisfaction of Nomihold's claim. Nor could it be said that, by paying the interest, MTSF would be avoiding execution of the award, since execution was not yet available. MTSF was seeking to discharge an obligation arising in the ordinary course of business and there was no principled basis on which it could properly be restrained.

David Steel J had treated MTSF as an ordinary judgment debtor, but that was the wrong approach. This was a case where an ordinary course of business exception would usually be appropriate. Further, the judge was wrong to treat his conclusion that the prospects of MTSF's challenge to enforcement were not good as relevant. For the purposes of this application, he should have assumed that it had a worthwhile prospect of success.

It followed that the judge exercised his discretion wrongly and, therefore, the Court of Appeal had to consider the matter afresh. The balance of convenience was not the appropriate yardstick. MTSF should be permitted to meet its obligations due in the ordinary course of its business. Nomihold "had not come close" to demonstrating that there were exceptional circumstances which should lead the court to adopt a different course.

 

Comment

The decision confirms that, although the court will grant freezing orders in aid of enforcement of arbitration awards, there must be exceptional circumstances to justify omitting an exception permitting payments in the ordinary course of business. The court distinguished the position of the judgment debtor in this situation by reference to the fact that the award, although now a court judgment, was not currently enforceable. As such, the position was not analogous to the usual post-judgment scenario.

 

Case

Mobile Telesystems Finance SA v Nomihold Securities Inc [2011] EWCA Civ 1040 (www.practicallaw.com/9-508-1063).

 
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